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Ensco releases Q3 results, Einhorn sitting on nice gain

October 22, 2010 | About:
David Einhorn’s Greenlight Capital opened a large position in Ensco plc (ESV) in the second quarter. BP’s Deepwater Horizon oil spill and the federal government’s drilling moratorium in the Gulf caused Ensco’s share price to fall from the low $50’s to the mid $30’s. Einhorn now holds more than 5% of the company at an average cost of $39.41. At today’s price, that’s nearly a 20% gain.

Quick background on Ensco: They’re an oil and gas contract driller with 41 jackup rigs, 8 ultra-deepwater semisubmersible rigs (in operation or under construction or repair), and 1 barge rig. They operate throughout the world and are based in the U.K.

Ensco recently released Q3 earnings of $.91/share on revenue of $428 million. Revenue increased $409 million in Q3 2009, but EPS dropped from $1.01. Results were hampered by a customer dispute but still beat analyst expectations. Management held their earnings call yesterday and gave more color on specific rigs. You can read it yourself over at Seeking Alpha. The direct link is here.

The thing that impressed me the most about Ensco is their management’s strong understanding of capital allocation. They’ve got plenty of cash on their books, but they’re not making rash decisions because of it. In response to a question of what they plan to do with their cash, CEO Dan Rabun gave this answer:

Well, I think as we have always said, a very high priority for us is managing capital and capital allocation. We continue to look at rigs in the market; we continue to be interested in acquiring additional jackups and also looking at deepwater rigs as well. So I think that will continue for the foreseeable future. I think you know if you look at what we have done now in just the last quarter, we have invested over $400 million in the fleet with about half of that, a little less than half of that being allocated to the ENSCO 109 to add a high spec jackup, we increased our dividend life now to a run rate of about $50 million a quarter. So we have engaged in the combination of investing in the business and also returning capital to shareholders. We will continue to look at that overtime.


That’s the kind of answer I like, and I suspect a big reason why Einhorn, John Griffin, Robert Rodriguez, Carl Icahn and other gurus have opened and increased positions in Ensco over the last four months. It should also be noted that Ensco significantly increased their dividend in the spring of 2010 and now yields nearly 3%.

Einhorn has noted that "we appear to be getting the shallow water fleet at a low value and the deepwater fleet... for free."

With the Gulf drilling moratorium being lifted, and the potential for oil and gas prices to rise, Ensco is very attractively priced today. I’ve seen estimates of fair value anywhere from $60 to $90. It will be interesting to see what, if anything, Einhorn says about Ensco in his Q3 investment letter.

Disclosure: Long ESV

The Purchase Price

About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

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